The good and the bad of Basel III

June 25, 2010

It’s looking as though the FT was, thankfully, a little over-hasty when it led today with a big story saying that the banks have won the Basel battle over liquidity requirements. A BIS spokesman (the BIS is the organization hosting the Basel III negotiations) says that weakening liquidity requirements hasn’t even been discussed, let alone agreed to. Yes, it’s likely that the banks will win some concessions at some point, but there’s a long way to go before then.

Joel Clark is hearing similar messages:

Senior committee members have told Risk they were shocked to see reports suggesting the proposal for a net stable funding ratio (NSFR) would be shelved, as they don’t intend to make any firm plans until the next Basel Committee meeting on July 15 at the earliest…

“Leading up to the July meeting, there are a lot of efforts to see if we have an agreement among committee members on the direction forward, but we haven’t got there yet. The committee has not agreed to the elimination of any parts of the proposal, I can say that definitively,” says one US-based regulator and committee member.

Meanwhile, another potentially enormous problem is lurking in the background: the crucial yet brain-numbing issue of accounting standards. Citigroup’s Bill Rhodes tells Global Risk Regulator’s David Keefe that the distance between the U.S. and Europe is widening, and that it could end up being a “deal-breaker”:

“Without globally agreed rules on how to measure the value of bank assets and liabilities and other aspects of the banking business, any other agreements aimed at increasing the resilience of the financial system will be virtually meaningless,” Rhodes, a former Citigroup vice-chairman, told GRR.

Amid signs that the G20’s target of achieving a convergence of accounting rules by June 2011 has already gone by the board, Rhodes says long-awaited proposals on financial instrument accounting from the Financial Accounting Standards Board (FASB), America’s accounting rule-maker, have widened the international split.

Any new regulatory regime is going to have to have banks around the world all following the same rules when it comes to basic things like measuring the value of their assets. Right now, that’s not the case — and while everybody agrees that agreement is necessary, no one seems willing to make the necessary compromises.

Is it too much to hope that Barack Obama will use his regulatory-reform victory to bash some heads on this issue at the G20? Probably yes: the details of accounting standards when it comes to measuring bank balance sheets are really not the kind of things that heads of state tend to talk about at summit meetings. But the longer the current disparity is perpetuated, the less likely it is that there will ever be any kind of an international consensus. Which could scuttle Basel III before it’s even implemented. Let’s hope that someone, somewhere, has the power to force agreement on this issue.

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